nOT WHAT THEY SEEM!
The purpose of this article is to help you avoid falling
victim to pyramid schemes, whether simple or disguised. Simple
pyramid schemes are similar to chain letters, while disguised
pyramids are like wolves in sheep's clothing, hiding their true
nature in order to fool potential investors and evade law
enforcers.
To join you might be required to pay anywhere from a modest
investment to thousands of dollars. In the above example, $1,000
buys a position in one of the boxes on the bottom level. $500 of
your money goes to the person in the box directly above you, and
the other $500 goes to the person at the top of the pyramid, the
promoter. If all the boxes on the chart fill up with
participants, the promoter will collect $1,600, and you and the
others on the bottom level will each be $100 poorer. When the
promoter has been paid off, his box is removed and the second
level becomes the top or payoff level. Only then do the two
people on the second level begin to profit. To pay off these
two, 32 empty boxes are added at the bottom, and the search for
new participants continues.
Each time another level rises to the top, a new level must
be added to the bottom, each one twice as large as the one
before. If enough new participants join, you and the other 15
players on your level may make it to the top. However, in order
for you to collect your payoffs, 512 prople would have to be
recruited, half of them losing $1000 each.
Of course, the pyramid may collapse long before you reach
the top. In order for everyone in a pyramid scheme to profit,
there would have to be a never-ending supply of potential (and
willing) participants. In reality, however, the supply of
participants is limited, and each new level of participants has
less chance of recruiting others and a greater chance of losing
money.
To look like a multi-level marketing company, a pyramid scheme
takes on a line of products or services and claims to be in the
business of selling them to consumers. However, little or no
effort is made to actually maarket the products. Instead, money
is made in typical pyramid fashion, from recruiting. New
distributors are pushed to purchase inventory when they sign up.
For example, you might be required to purchase $1,000 of
near worthless products in order to become a "distributor." The
person who recruited you receives $500 (a fifty percent
commission) and $500 goes to the top (the company, in this case).
Notice the similarity to the simple pyramid scheme diagramed
earlier.
Most disguised pyramids, however, are not this easy to
unmask. Pyramid schemes often choose products which are cheap to
produce but which have no established market value, such as new
miracle products, exotic cures, etc. This makes it difficult to
tell whether there is a real consumer market for the products.
The best way to avoid a well disguised pyramid fraud is to know
what to look for in a legitimate income opportunity.
DON'T MAKE A COSTLY MISTAKE!
Thousands of people have lost millions of dollars
participating in pyramid schemes. Many of the victims knew they
were gambling (although they didn't know the odds were rigged
against them). Many others, however, thought they were paying
for help in starting a small business of their own. These people
were fooled by pyramid schemmes disguised to look like legitimate
businesses.
WHAT IS A PYRAMID SCHEME?
Pyramid schemes are illegal scams in which large numbers of
people at the bottom of the pyramid pay money to a few people at
the top. Each new participant pays for the chance to advance to
the top and profit from payment of others who might join later.
A typical pyramid scheme looks like this:
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THINGS YOU SHOULD KNOW ABOUT PYRAMID SCHEMES
WHY WOULD ANYONE PAY TO JOIN A PYRAMID SCHEME?
Pyramid promoters are masters of group psychology. At
recruiting meetings, they rely on a frenzied, enthusiastic
atmosphere where group pressure and promises of easy money play
upon people's greed and fear of missing a good deal. Thoughtful
consideration and questioning are discouraged. It is difficult
to resist this kind of appeal unless you recognize that the
scheme is rigged against you.
DISGUISED PYRAMID - WOLF IN SHEEP'S CLOTHING
Because of law enforcement crackdowns, some pyramid
promoters attempt to make their schemes look like multi-level
marketing companies. Multi-level marketing is a lawful and
legitimate business method which uses a network of independent
distributors to sell consumer products.
MULTI-LEVEL MARKETING -
LEGITIMATE INCOME OPPORTUNITIES
In a multi-level structure you also have the opportunity to build and manage your own salesforce by recruiting, motivating, supplying and training others to sell those products. Your compensation then includes a percentage of the sales of your entire sales group as well as earnings on your own sales to retail customers. This opportunity has made multi-level marketinng an attractive way of starting a business with comparatively little money.
HOW TO TELL THE DIFFERENCE BETWEEN A LEGITMATE BUSINESS AND A DISGUISED PYRAMID SCHEME
- How much are you required to pay to become a distributor?
- Will the company buy back unsold inventory?
- Are the company's products sold to consumers?
1. Start up Cost?
IF THE COST IS SUBSTANTIAL, BE CAREFUL!The start-up fee in multi-level companies is generally small (usually for a sales kit sold at or below company cost). These companies want to make it easy and inexpensive for you to start selling.
Pyramid schemes, on the other hand, make virtually all of their profit on the signing up of new recruits. Therefore, the cost to become a distributor may be high. CAUTION: PYRAMIDS OFTEN DISGUISE ENTRY FEES AS PART OF THE PRICE CHARGED FOR REQUIRED PURCHASES OF TRAINING, COMPUTER SERVICES, PRODUCT INVENTORY, etc. These purchases may not even be expensive or "required", but there will be considerable pressure to "take full advantage of the opportunity".
2. BUY-BACK OF INVENTORY?
IF YOU COULD BE STUCK WITH UNSOLD INVENTORY, BEWARE!Legitimate companies which require inventory purchhases will usually repurchase any unsold products if you decide to quit the business. Some state laws require buy-backs for at least 90% of your original cost.
3. SALES TO CONSUMERS?
IF THE ANSWER IS NO OR NOT MANY), STAY AWAY!This is a key element. Multi-level marketing (like other methods of retailing) depends on selling to consumers and establishing a market. This requires quality products, competitively priced. Pyramid schemes, on the other hand, are not concerned with repeat sales to users of the product. Profits are made on volume sales to new recruits, who buy the products, not because they are useful or attractively priced, but because they must buy them to participate in the scheme.
HOW TO PROTECT YOURSELF FROM A BAD INVESTMENT
2. Ask questions:
About the company and its officers.
About the products - their cost, fair market value,
source of supply, and potential market in your area.
About the start up fee (including any required
purchases).
About the company's guaranteed buy-back of any required
purchases.
About the average earnings of active distributors.
3. Get written copies of all available company literature.
4. Consult with others who have had experience with the company and its products. Check to see if the products are actually being sold to consumers.
5. Investigate and verify all information. Do not assume thhat official looking documents are either accurate or complete.
WHERE TO GO FOR HELP
MORE HELP!